According to Fortune Magazine, Berkshire Hathaway is now considering initiating dividend payments. Berkshire Hathaway is a publicly traded corporation led by legendary investor Warren Buffett. While Buffett considers dividends as part of his investment strategy, Berkshire has never paid a dividend. Buffett feels that Berkshire can make more money for investors by reinvesting its profits rather than paying dividends. Yet he seeks dividend payers as he invests Berkshire funds. Additionally, Buffett has advised for quite some time that retirement savers invest in dividend payers as part of their personal investment strategy. Buffett, now 86 years old, is reportedly considering retirement. For years Berkshire has not bought back its stock. It is now considering stock-buybacks. Berkshire has made substantial investments in Apple, the world’s top dividend payer in total dollars. According to the Wall Street Journal, Apple has repurchased almost 21% of its stock since 2012. Buybacks, along with the iPhone’s success, have contributed to Apple’s rising earnings per share and its record high stock price of $153.99 on May 9. Apple’s market capitalization is more than $800 billion, a first for any U.S. company. For many years the company, led by world’s greatest investor, has avoided paying dividends and buying back stock. It has now invested in America’s largest company which pays more in dividends than any company in the world and has bought back more than 20% of its stock. Questions: What is a good stock buyback? When should a corporation pay dividends? Should an investor buy dividend-paying stock?
17 Comments
Bryce B
5/14/2017 12:42:47 pm
Stock buybacks are good when they are to benefit the company buying back the stock. By repurchasing stock, companies can reduce the number of company shares outstanding which, in turn, increases the earnings per share ratio. This is also good for shareholders who sell their shares in the buyback and the ones who hold on to the stock because they will see the value rise (MacEwan, 2016).
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Ilsa
5/16/2017 09:28:31 pm
A good stock buyback returns cash to shareholders, reduces the total number of shares outstanding and increases the valuator the remaining shareholders. Buybacks make sense under specific conditions;
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Maria O
5/14/2017 08:37:33 pm
A good buyback is a fairly, low-risk approach for companies to use extra cash and re-invest it into R&D or a new product. Although, a new product can be risky. If these new investments do not pay off, that hard-earned cash and efforts are wasted. A good buyback is when companies invest in themselves because they are confident their shares are undervalued and offer a good return for shareholders. (McClure, 2014)
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Tina D
5/15/2017 03:34:35 pm
A good stock buyback is one that achieves the goals the company is looking to achieve. What does that mean in a nutshell? If the company is looking to raise their share price, then a stock buyback will do that by reducing the number of shares on the available market. (Wohlner, R. 2015) If they are looking to prevent a hostile takeover of their company, then buying back a load of their shares would protect them from companies who are preying on them.
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Milissa Plescia
5/15/2017 03:48:54 pm
As we learned in Principles of Accounting 2, a good buyback is one in which a company is using their excess cash to repurchase stock, when the stock is undervalued, when it is being repurchased at a set price, and when the repurchased stock is not then reissued to executives as compensation (Plescia, M., 2017). Buybacks of stock can be a smart move if it helps to raise the stock price while reducing outstanding shares. This benefit is passed on to the shareholders through higher earnings per share. However, the if the stock is being repurchased at an undervalued rate this can actually hurt current shareholders (Tully, Fortune, 2016).
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Preston
5/15/2017 05:30:27 pm
Stock buybacks are one of those iffy things, they could be good, but they could also mean bad things on the horizon for a company and its investors. Typically a stock buyback is a good one when a company may feel the market has discounted its share price too much. A stock price can take a hit in the market for many reasons, such as, weaker-than-expected earnings results, an accounting scandal or just a poor overall economic climate. So, when a company spends millions of dollars buying up its own shares of stock, it is saying that management believes the market has gone too far in undervaluing the company and thus its shares – which is a positive sign. A bad buy back would be one when and if a company is merely using buybacks to prop up ratios, provide short-term relief to an ailing stock price or to get out from under excessive dilution.
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Heather Hernandez
5/16/2017 05:42:50 pm
Repurchasing of company stock has overtime been used as a way to manipulate the price of stock. An increase of earning per share is a great sign of increased value for shareholders (Brageron, Kulchania & Thomas, 2011). In the modern economic times, companies have often used announcements about buybacks to their advantage to end up not executing the buyback (Bhargav, 2010). A good buyback must aim at achieving the ultimate increased value of company stock. In the event that a company stock is undergoing a successful high spell where the price-earnings ratio is exceptionally high, what would be the use of a buyback? A stock repurchase is considered good if it will add a substantial amount of earnings (Brageron, Kulchania & Thomas, 2011).
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Melissa P
5/16/2017 10:03:48 pm
When companies have the advantage of a good stock buyback, they know exactly when the best time to purchase back their shares. Stock buybacks benefit companies in returning cash to shareholders, reduce the total number of shares outstanding, and increase the value for the remaining shareholders. Executives know their corporation, the challenges they face, and their strategic plan better than anyone else. Hence, why they wait to repurchase their stock at a lower cost and not when it is undervalued making it a good stock buyback. (Trainer, Forbes, 2016)
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Eugene M. Chin-Young
5/16/2017 10:06:47 pm
A good buyback is buying back stock while the company has excess cash available and it buys back some of its own stocks at a price far below the companies intrinsic value, this number depends on its average market value and should be judged carefully. A corporation should start paying dividends after it is done repurchasing a fair amount of it's own stocks. They are in effect reducing the number of shares they have outstanding with these buybacks. The fact that there are now less stocks available, the current shareholders will benefit from these dividends sharing while, helping to drive the price of the stock upwards. Of course, I think it is very attractive for investors to buy dividend paying stock. It only makes sense to receive dividends from your stock purchases, as these funds can give back investors much needed money for their own benefit and personal financing use.
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Danielle R
5/17/2017 04:07:21 pm
What is a good stock buyback?
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Danny Herran
5/17/2017 05:38:35 pm
When a stock has a good market price companies believe that buy back their own shares would rise their earning per shares. Like Apple doing a buy back in 2012 for almost 21% of its stock which benefit them to by rising their earning per share. I believe a corporation should pay a dividends when they have had a successful year in their performance. Dividends are meant for those stockholders to benefit from the profits the corporations has earned.
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Jim M
5/17/2017 05:52:23 pm
Stock buybacks are a double edged sword that can either be beneficial or detrimental if you use this type of information to determine if certain stock should be purchased or not. On one hand if a company is just starting to buyback it's stock then when you purchase the stocks your share instantly give you more stake in the company and therefore is more valuable then when it was first purchased. Comparatively if a different company is buying back their stock it could be to drive market price up to prevent a hostile take over. Depending on the specific case that you are dealing with would determine what play to make. You do your research and see that a company is doing well with no apparent take over being attempted then the smart play would be to buy the stock because the company is most likely trying to drive up market value of the stock to cause growth of the company which would only help the stock you purchased in the long run. However if it is the other case and there is a hostile take over in future then you would want to play a short game and either completely avoid the stock or purchase the stock with a plan to flip it for a small quick profit.
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AuthorFrank Longo, MBA, CPA is Assistant Professor of Business at Centenary University's School of Professional Studies. He teaches Accounting and Finance at both the graduate and undergraduate levels. ArchivesCategories |